UPPER LIKE INVESTMENTS LTD v. SINO-RANK INTERNATIONAL LTD

HCA 17637/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 17637 OF 1999

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BETWEEN

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REASONS FOR JUDGMENT

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1.   On 13 November 1999 Upper Like Investments Ltd (“the old plaintiff”) commenced this action against the defendant by issuing the writ of summons with statement of claim endorsed thereon.

2.  The old plaintiff’s claim against the defendant is for the repayment of a loan in the sum of HK$40,000,000 lent to the defendant  (“the loan”) pursuant to a loan agreement between the old plaintiff and the defendant dated 13 July 1993 (“the loan agreement”) with interest thereon at the rate of 2% per month from 14 August 1993.

3.  By an affirmation of service of Yip Siu Ha affirmed on 29 November 1999 the deponent affirmed that the writ of summons together with the statement of claim endorsed thereon was served on the defendant by leaving the same at its registered office at Room 2202, 22/F, Telford House, 16 Wang Hoi Road, Kowloon Bay, Kowloon, Hong Kong being the registered office of the defendant.

4.  As no notice of intention to defend was given by the defendant, the old plaintiff on 18 December 1999 entered default judgment against the defendant for the sum of HK$40,000,000 with interest thereon “at the contractual rate of 24% per annum” from 14 November 1993 to date of the judgment and thereafter at judgment rate until payment, and fixed costs (“the judgment”).

5.  On 26 August 2000 the old plaintiff assigned its interest in the loan to China Associate Hong Kong Ltd (“the new plaintiff”) as set out in the assignment made on that day between the old plaintiff and the new plaintiff (“the assignment”).

6.  By the order of Master K. Lo made on 16 August 2010 upon the application of the new plaintiff, it was ordered that the new plaintiff be made a party in this action and that the proceedings be carried on as if the new plaintiff had been substituted for the old plaintiff with no order as to costs.

7.  Notice of the assignment by the old plaintiff to the new plaintiff was only given to the defendant about 10 years later.  This was by a letter dated 26 July 2010 from the new plaintiff to the defendant which was received by the defendant in or about August 2010 together with the order of Master K. Lo made on 16 August 2010.

8.  The new plaintiff obtained a charging order nisi on 13 September 2010 from Master Ho whereby it was ordered that unless sufficient cause to the contrary be shown the defendant’s interests in the properties as set out in the Schedule to the charging order nisi (“the properties”) should stand charged with the payment of HK$40,000,000 together with interest thereon at the rate of 24% per annum from 14 November 1993 to 18 December 1999 and thereafter at judgment rate until payment and costs.

9.  On 4 November 2010 the defendant applied by summons to, inter alia, set aside the judgment entered by the new plaintiff on 18 December 1999.

10.  On 16 August 2011 Master Ho ordered that the judgment be set aside.  He also ordered that the charging order nisi be discharged.  The master gave the defendant unconditional leave to defend and gave directions for the filing of pleadings.  He also ordered that costs be in the cause.

11.  The new plaintiff filed a notice of appeal against the order of Master Ho on 30 August 2011.

12.  The appeal came before me for hearing on 14 November 2011.  I dismissed the appeal with costs to the defendant.  I indicated at the time that reasons in writing would be given later.  This I now do.

13.  The relevant background facts are that the old plaintiff advanced the loan to the defendant under the loan agreement dated 13 July 1993.

14.  As set out in the loan agreement the old plaintiff advanced a loan of $40,000,000 which was to be repaid within 4 months from date of advance i.e. on or before 14 November 1993.  Interest was to be paid on the loan at the rate of 2% per month with the first instalment of HK$800,000 payable upon execution of the loan agreement.

15.  Under the loan agreement the defendant was required to provide the properties as security for the loan advanced by the old plaintiff.

16.  By a mortgage dated 14 July 1993 between the defendant as borrower and the old plaintiff as lender the properties were mortgaged to the old plaintiff (“the mortgage”).

17.  As the defendant defaulted in repayment, the old plaintiff brought proceedings. By the Originating Summons (“the OS”) in Miscellaneous Proceeding No. 4243 of 1993 issued on 13 December 1993 (“the first action”) the old plaintiff claimed against the defendant, as the 1^st defendant, for payment of all monies and interests due and owing under the mortgage and delivery of vacant possession of the properties.

18.  By the OS the old plaintiff also claimed against Timothy Lau Hung Tat (“Lau”), a former director of the defendant, as the 2^nd defendant, for all sums due under a guarantee dated 14 July 1993 executed by Lau in favour of the old plaintiff to secure lending facilities granted to the defendant.

19.  By a summons dated 17 January 1994 in the first action the old plaintiff applied for an order that the defendant do deliver up vacant possession of the properties and for judgment against the defendant and Lau “in the principal sum of $40,000,000” with interest and costs (“the old plaintiff’s summons”). 

20.  Thereafter, by a consent order made by Master Beeson (as she then was) on 28 March 1994 it was ordered that the hearing of the old plaintiff’s summons be adjourned sine die with liberty to restore with costs reserved.

21.  The old plaintiff’s summons was never restored for hearing.

22.  Affidavit evidence has been filed on behalf of the new plaintiff and the defendant.  Needless to say there are substantial disputes of fact between the parties.  It is not appropriate to conduct a mini trial on affidavit evidence without discovery and cross-examination.

23.  The first matter to consider is whether the judgment was a regular judgment or irregular judgment.  The defendant’s case is that it was irregular as proper service of the writ of summons was not effected.

24.  I am unable to accept the submission that the writ was not properly served.

25.  Section 356 of the Companies Ordinance Cap. 32 provides :

“ A document may be served on a company by leaving it at or sending it by post to the registered office of the company.”

26.  O. 65, r. 8 RHC provides that an affidavit of service of any document must state

“ by whom the document was served, the day of the week and date on which it was served, where it was served and how.”

27.  The affirmation of service of Yip Siu Ha does precisely that.

28.  The deponent clearly affirms at paragraph 1 that

“ I did on Monday, the 15^th day of November 1999, personally serve the abovenamed Defendant SINO-RANK INTERNATIONAL LIMITED with a true copy of Writ of Summons in this action with its Chinese translation by leaving the same at Room 2202, 22/F., Telford House, 16 Wang Hoi Road, Kowloon Bay, Kowloon, Hong Kong being the registered office of the said Defendant.”

29.  What the deponent said is also in accordance with Form 13 in Vol 35 Atkin’s Encyclopaeia of Court Forms in Civil Proceedings 2^nd edn 1991 Issue.

30.  The defendant’s case is that it did not receive the writ and the judgment.  Be that as it may, it seems to me that on the evidence before the court the writ was properly served by leaving it at the registered office.  The affirmation of service does state by whom the document was served, the day of the week and date it was served, where it was served and how, as required by O. 65, r. 8.

31.  I am satisfied that the judgment was regular as the writ was properly served.

32.  The question to consider is whether the defendant has shown a defence on the merits which has a real prospect of success.  The master has decided that the defendant has shown that and in my judgment the master rightly exercised his discretion to set aside the judgment and to discharge the charging order nisi.

33.  Although the defendant has raised a number of defences it seems to me that it is only necessary to deal with one defence for the purpose of showing that there is a defence which has a real prospect of success namely, the defence raised of illegal interest on the loan rendering the loan unenforceable.

34.  Section 24 of the Money Lenders Ordinance Cap. 163 provides

“ (1) Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

(2) No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1).”

35.  “Interest” is defined in Section 2 as including

“ any amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan.”

36.  It is plain from the above provisions that it is illegal to lend or offer to lend money at an effective rate of interest which exceeds 60% per annum.  The consequence of that is that in any case where the effective rate of interest exceeds 60% per annum no agreement for the repayment of any loan or payment of interest and no security given in respect of any such agreement or loan shall be enforceable.

37.  In addition to the affirmations filed in this action the defendant also relied on affirmations filed in the first action on behalf of the defendant in opposition to the old plaintiff’s summons.  These are exhibited as “YWK-10” to the 2^nd affirmation of Yip Wai Ki a director of the defendant.  Exhibit “YWK-10” includes Lau’s 1^st affirmation affirmed on 28 February 1994 with exhibits, Lau’s 2^nd affirmation affirmed on 2^nd March 1994 with exhibits and the affirmation of Joseph Lee Chin Wai (“Lee”), a senior accountant with Deloitte Touch Tohmatsu affirmed on 28 February 1994 giving his calculations of the effective rate of interest on the basis of the facts set out in the evidence of Lau.

38.  The defendant’s case as clearly set out in the affirmation evidence of Lau in the first action is that the effective rate of interest charged in respect of the loan was in excess of 60% per annum. 

39.  At paragraphs 7 and 8 of his 1^st affirmation Lau states

“ 7. The loan amount expressed in the loan documentation was HK$40 million but the amount actually lent was only $34.8 million. On 13/7/1993 which is the drawdown date for the loan, a sum of HK$3.2 million and HK$1.2 million was deducted respectively from the loan amount and made payable to one company called World Smart Enterprises Ltd. and one called Hing Shing Consultant Company. A further sum of HK$0.8 million as the purported first month interest payment for the loan was also deducted from the loan. There is now produced and shown to me a copy of receipt dated 14/7/1993 given by World Smart Enterprises Ltd. in favour of the 1^st Defendant and marked “LHT-1”. Hing Shing Consultant Company had not given any receipt to the 1^st Defendant. However the HK$1.2 million was given to Hing Shing Consultant Company through a cheque drawn by Messrs. Poon & Cheung in its favour. There is also now produced and shown to me a copy of Receipt given by the Plaintiff to the 1^st Defendant dated 14/7/1993 for the amount of HK$0.8 (sic) and a copy of the Debit Note issued by the Plaintiff to the 1^st Defendant dated 14/7/1993 and respectively marked “LHT-2” and “LHT-3”.

8. In return for this sum of HK$34.8 million being the amount of money actually lent to the 1^st Defendant, the 1^st Defendant had to pay back by the end of 4-month period a total sum of HK$42.4 million which is the sum the Plaintiff is demanding in this present action calculated up to 13/11/1993. The 1^st Defendant, therefore, has to pay interest in the amount of HK$7.6 million for a loan of HK$34.2 million within a period of 4 months. I have been advised by Mr. Joseph Lee Chin Wai, a senior accountant of Messrs. Deloitte Touche Tohmatsu that this works out to an effective interest rate of 65.5% per annum.”

40.  Lee in his affirmation sets out his calculation of the effective rate of interest on the basis of the facts as set out in Lau’s affirmation and concludes that the effective rate of interest on the amount actually lent amounts to 65.5% per annum.

41.  It is significant that the old plaintiff did not file any evidence to rebut the allegation of illegal interest raised by the defendant in the affirmations in opposition to the old plaintiff’s summons in the first action.

42.  Instead, as I have said, by a consent order made by the master on 28 March 1994 the hearing of the old plaintiff’s summons was adjourned sine die with liberty to restore.

43.  The defendant’s case is that the first action was settled but that is disputed. 

44.  I would observe, however, that the old plaintiff’s summons was never restored in the first action.  The old plaintiff did not proceed further with the first action after the consent order was made on 28 March 1994. 

45.  I would also observe that the notice of the assignment was only given by the new plaintiff to the defendant by letter dated 26 July 2010 which was about 10 years after the assignment.  No explanation has been provided for this long delay.

46.  It seems to me that the defendant is entitled in this action to raise the defence of illegal interest on the loan rendering the loan agreement unenforceable.  In my judgment that is clearly a defence on the merits with a real prospect of success.

47.  I would also observe that the new plaintiff has not adduced any evidence to contradict the evidence of the defendant as set out in the affirmations filed in the first action which raised the defence of illegal interest.

48.  Mr Chan, for the new plaintiff, submitted that the credibility of Lau and Yip Wai Ki was in issue.  That may be so, but that is clearly a matter for discovery and cross-examination at trial.

49.  Mr Chan further submitted that on the documents exhibited to Lau’s affirmations in the first action the defence of illegal interest was not credible.  He relied on two documents exhibited by Lau in his 1^st affirmation :

(1) Exhibit “LHT-4”; and

(2) Exhibit “LHT-7”.

50.  According to paragraph 10 of Lau’s 1^st affirmation, he was told by Gao Yuwen (“Gao”), a former director of the defendant, that a representative of the old plaintiff gave Gao

“ a draft of facility letter in the version as seen in the Facility Letter dated 8/7/1993 for Mr Gao’s signature. Mr Gao was asked to print the said Facility Letter on paper with World Ocean Ltd’s letter head thereon. Eventually Mr Gao signed the same and gave it back to the representative of the Plaintiff. Mr Gao did not remember who that person was. There is now produced and shown to me a copy of the said Facility Letter and marked “LHT-4”. ”

51.  In the facility letter exhibited as “LHT-4” it is stated that World Smart Enterprise Ltd acts as an agent for World Ocean Ltd to arrange a loan facility of HK$40,000,000 from the old plaintiff as lender and World Ocean Ltd as borrower.  The loan amount was stated to be HK$40,000,000 for a period of 3 months after the loan drawdown date with interest at 2% per month to be paid in advance.  Exhibit “LHT-4” is dated 8 July 1993 and was signed by Gao for and on behalf of World Ocean Ltd.

52.  The facility letter “LHT-4” was superseded by the loan agreement dated 13 July 1993 according to Lau.  The loan agreement was exhibited as “LHT-6”.

53.  It was submitted by Mr Chan that exhibit “LHT-4” showed that World Smart Enterprises Ltd was an agent for World Ocean Ltd a company associated with the defendant.  It was his submission that the payment of HK$3,200,000 which Lau, at paragraph 7 of his 1^st affirmation, said was deducted from the loan amount of HK$40,000,000 and was paid to World Smart Enterprises Ltd was in fact a payment made to an associated company of the defendant.   However, as Mr Kwok, for the defendant, rightly submitted, Lau has categorically denied in his affirmation evidence that World Smart Enterprises Ltd was an agent of the defendant.

54.  Lau at paragraphs 13 and 14 of his 1^st affirmation said

“ 13. The aforesaid Facility Letter was later on superseded by a Facility Letter addressed to the 1^st Defendant by the Plaintiff which I had signed thereon for and on behalf of the 1^st Defendant. There is now produced and shown to me a copy of the Facility Letter dated 13/7/1993 and marked “LHT-6”. This Facility Letter did not give a true picture of the underlying money lending transaction. It did not truly state that the interest agreed or paid or payable by the 1^st Defendant as consideration or otherwise in respect of the loan. It did not state that the aforesaid sums of $3.2 million and $1.2 million were to be paid at the outset or at all.

14. In the money lending transaction of our present action, the loan documentation states that the interest charged on the loan was 2% but in fact it was otherwise. The earlier Facility Letter dated 8/7/1993 signed by Mr. Gao Yuwen for and on behalf of the 1^st Defendant sates (sic) that World Smart Enterprises Ltd. was our agent but in fact it was not.”

55.  Exhibit “LHT-6” is the loan agreement which Lau said superseded the facility letter exhibit “LHT-4”.

56.  Lau has affirmed that World Smart Enterprises Ltd was not the defendant’s agent.  Neither the old plaintiff nor the new plaintiff has filed any evidence to rebut what Lau said.

57.  The other document relied on by Mr Chan is exhibit “LHT-7” to the 1^st affirmation of Lau.  This was an authorization letter dated 13 July 1993 authorising Messrs Poon & Cheng solicitors to split cheques from the proceeds of the mortgage loan to include a cheque for HK$3,200.000 to World Smart Enterprises Ltd and a cheque for HK$1,200,000 to Hing Shing Consultant Company.  It was submitted that since the defendant gave the instructions to the solicitors to split the cheques in the manner as set out therein the amounts of the cheques went to the defendant or its associated companies.  I am unable to accept this submission.

58.  Messrs Poon & Cheng were the solicitors for the old plaintiff, not the defendant.  Nowhere in exhibit “LHT-7” is it stated that World Smart Enterprises Ltd or Hing Shing Consultant Company was an agent or associate of the defendant.

59.  Lau said at paragraph 15 of his 1^st affirmation

“ 15. On 13/7/1993 when I went to the office of Messrs. Poon & Cheung for execution of the Mortgage Document and a personal guarantee, I was asked to sign an authorization letter prepared by Messrs. Poon & Cheung authorising the splitting of the cheques in relation to the proceeds of the loan. I had no say on the terms of the said authorization letter except that in relation to the remaining balance of the loan (which was paid to Messrs. Tang, Lai and Leung after discharging the existing encumbrances of the secured property at Kau Wah New Village). There is now produced and shown to me a copy of the said authorization letter and marked “LHT-7”.”

60.  On the defendant’s case, it was the old plaintiff’s solicitors which prepared the authorization letter authorizing the splitting of cheques to World Smart Enterprises Ltd in the sum of HK$3,200,000 and to Hing Shing Consultant Company in the sum of HK$1,200,000. No evidence has been filed by either the old plaintiff or the new plaintiff rebutting the evidence of Lau on this matter.

61.  Whether or not Lau will be believed at trial is clearly a matter to be resolved at trial with the benefit of discovery and cross-examination.

62.  I am satisfied that the defendant has shown a defence on the merits with a real prospect of success.  As this will have to be resolved at trial it is neither necessary nor desirable to deal with the other defences raised at this interlocutory stage.

63.  In my judgment the master exercised his discretion correctly in making the order setting aside the default judgment and discharging the charging order nisi.

64.  For the above reasons I dismissed the new plaintiff’s appeal with costs to the defendant.  In my view costs should follow the event.